STRATFOR'S TOP PREDICTIONS FOR THE NEXT DECADE: China Collapse, Global Labor Shortages, New American Dominance

STRATFOR has the answers. In aDecade Forecastreleased yesterday, the global intelligence company predicts Chinese economic collapse, game-changing global labor shortages, and continued American dominance because of a gradual retreat from international engagement. Welcome to 2010.

We spoke with Peter Zeihan, Vice President of Strategic Intelligence, about STRATFOR's predictions, of which he was an author. Below are edited excerpts from our conversation.

TBI: What are the broad trends that Stratfor sees shaping the world in the next decade?

Zeihan: Probably one of the biggest breaks that Stratfor has with conventional wisdom is that most of the world is convinced that the United States is a power in terminal decline. In fact we see the United States withdrawing from its two wars, regardless of whether or not they've ended, and returning to a more balanced attention span in dealing with the rest of the world.

Most of the rest of the world will view that as an American retreat from prominence and a sign that the U.S. is in decline once again. But really when you're a naval power and a merchant power, being out of the Middle East is increasing greatly your power to act and you willingness to act. So we see it as a very American-centric decade moving forward.

Which predictions are most surprising?

Aside from the United States not going anywhere, I would say we expect the economic collapse of China in this coming decade. We've been talking for awhile about how the economic system there is remarkably unstable and we think that they're going to reach a break point as all of the internal inconsistencies come to light and shatter. By the end of the decade, it'll be pretty obvious to everybody that the China miracle is over. As we enter the decade, people are finally, finally starting to talk about China bubbles. If only their problem was that simple!

With the Europeans, the new European treaty actually matters. The Lisbon Treaty is the first of dozens of treaties that the EU has done, but it's the first one that actually does away with most of the single member vetoes; and so you've got Germany actually able to force its will upon a lot of states. Germany is going to be ascendant in a manner that it has not been since the late 1930s! Doesn't mean it's going to be rolling tanks into Poland or anything like that, but they are going to be using their institutional power to push everybody around.

That is going to cause a remarkable degree of discord and unpredictability in Europe, and that is something that the Russians are going to take advantage of every chance that they get. The Russians realize that they're in a race against the clock before their demographics kill them as a country, and so they want to make sure that they've got as wide of a buffer as possible. As long as Europe is at each others throats, even if its just with bureaucratic paper, the Russians are going to take advantage of that to strengthen their western perimeter and push the frontier into Europe as far as they can. They know in 20 or 30 years they're not going to be able to do much, so they want to buy as much time and space as possible.

What does the American business community need to pay closest attention to?

The business community is probably going to get its shirt handed to it over China. Now American investment into China is not nearly as robust as most people think. It's actually only five or six billion dollars every year, very, very small in the grand scheme of things, even by Chinese standards. But the ability of China to continue to supply cheap exports to the United States might come into danger. Not on the whole, because all of the Chinese regional cities will still have an interest in doing that, even once the Chinese system cracks. But you're going to have to pay very close attention to your supply chain there as the politics of China become unglued.

Japan -- also a major investor in a lot of places, also a major supplier of a lot technology and a lot of capital -- Japan's demographics are the worst in the world. In the next decade, they're going to have to find some way to rectify the fact that they just don't have sufficient number of workers to supply what they need.

They could turn to their traditional surplus labor source, which is Korea and China, in which case we could have some sort of East Asian conflict, perhaps even military in nature. You have the world's second or third largest economies starting to duke it out in some manner, and businessmen in America are going to take notice. Or at least they'd better.

In a broader demographic issue, all of the countries in the developed world and most of them in the developing world are aging. We're going to be seeing a lot of countries maybe not start to have their populations decline but certainly have them age and no longer grow. The core economic platform that has driven the human condition for the last millennia is that populations will continue to get larger, markets will continue to get larger, there will be more capital available. In this next decade that starts to invert. The cost of capital is going to go up, the availability of markets are going to go up, and that's ultimately a deflationary environment. It'll get worse in future decades, but this next decade is when the rules of the game start to change.

China: doomed

"China’s economy, like the economies of Japan and other East Asian states before it, will reduce its rate of growth dramatically in order to calibrate growth with the rate of return on capital and to bring its financial system into balance. To do this, it will have to deal with the resulting social and political tensions," says STRATFOR's Decade Forecast.

It explains: "First, China’s current economic model is not sustainable. That model favors employment over all other concerns, and can only be maintained by running on thin margins."

"Second, the Chinese model is only possible so long as Western populations continue to consume Chinese goods in increasing volumes. European demographics alone will make that impossible in the next decade."

"Third, the Chinese model requires cheap labor as well as cheap capital to produce cheap goods. The bottom has fallen out of the Chinese birthrate; by 2020 the average Chinese will be nearly as old as the average American, but will have achieved nowhere near the level of education to add as much value. The result will be a labor shortage in both qualitative and quantitative terms."

"Finally, internal tensions will break the current system. More than 1 billion Chinese live in households whose income is below $2,000 a year (with 600 million below $1,000 a year). The government knows this and is trying to shift resources to the vast interior comprising the bulk of China. But this region is so populous and so poor — and so vulnerable to minor shifts in China’s economic fortunes — that China simply lacks the resources to cope."

Europe: heightened native-immigrant tension

"A deep tension will emerge in Europe between the elite — who will see foreign pools of labor in terms of the value they bring to the economy, and whose daily contact with the immigrants will be minimal — and the broader population. The general citizenry will experience the cultural tensions with the immigrants and see the large pool of labor flowing into the country suppressing wages. This dynamic will be particularly sharp in the core states of France, Germany and Italy," says STRATFOR's Decade Forecast.

It adds: "The elites that have crafted the European Union will find themselves under increasing pressure from the broader population. The tension between economic interests and cultural stability will define Europe. Consequently, inter-European relations will be increasingly unpredictable and unstable."

Turkey: rising

"Turkey is emerging as a self-confident regional leader, with a strong military and economy. We expect that trend to continue, and see Turkey emerging as the dominant regional power," says STRATFOR's Decade Forecast.

"The dynamic in the region between the Mediterranean and Iran — and even in the Caucasus and Central Asia — will be redefined by Turkey’s re-emergence."

Egypt: rising

"By 2020, Egypt will be changing from the type of country it has been since the 1970s — for the past generation it has lacked the capacity to influence developments beyond its borders. Like Turkey, Egypt is caught between secularism and Islam, and that tension could continue paralyzing it," says STRATFOR's Decade Forecast.

"However, as Turkey rises, Ankara will need a large source of cheap labor and markets for exports. The result will be a “coattails” effect for Egypt. With this synergetic fortification we expect not only an end to Egyptian quiescence, but increased friction between Egypt and all other regional players."

India: not a factor

"India has always been a country of endless unrealized potential, and it will remain so in the 2010s," says STRATFOR's Decade Forecast. "Its diversity in terms of regulations and tensions, its lack of infrastructure and its talented population will give rise to pockets of surprising dynamism. The country will grow, but in a wildly unpredictable and uneven manner; the fantastic expectations will not materialize."

As Zeihan notes, "Whether it's because of a geographic, social, or economic dysfunction, India just -- to put it bluntly -- can't get its sh*t together. India is the country of the future and always will be."

Iran: pacified

"We also see the Iranian situation having been brought under control. Whether this will be by military action and isolation of Iran or by a political arrangement with the current or a successor regime is unclear but irrelevant to the broader geopolitical issue. Iran will be contained as it simply does not have the underlying power to be a major player in the region beyond its immediate horizons," says STRATFOR's Decade Forecast.

As Zeihan notes, "We don't think Iran's going to matter at all. Iran has absorbed American attention really spectacularly for the last couple of years. That might last a couple of years in the new decade, but after that Persia just does not have the strength, never has had the strength to project power."

Iraq and Afghanistan: U.S. out

"The two major wars in the region will have dramatically subsided if not concluded by 2020," says STRATFOR's Decade Forecast.

Former Soviet states: rising

"We expect to see rapid economic development in this region," says STRATFOR's Decade Forecast.

"The repressed creativity of the Soviet period, plus the period of adjustment in the past 20 years, has created societies that are more flexible and potentially dynamic — even given demographic issues — than the rest of Europe."

Russia: scrambling

"Russia will spend the 2010s seeking to secure itself before the demographic decline really hits. It will do this by trying to move from raw commodity exports to process commodity exports, moving up the value chain to fortify its economy while its demographics still allow it," says STRATFOR's Decade Forecast.

"Russia will also seek to reintegrate the former Soviet republics into some coherent entity in order to delay its demographic problems, expand its market and above all reabsorb some territorial buffers. Russia sees itself as under the gun, and therefore is in a hurry. This will cause it to appear more aggressive and dangerous than it is in the long run. However, in the 2010s, Russia’s actions will cause substantial anxiety in its neighbors, both in terms of national security and its rapidly shifting economic policies."

Brazil: regional driver

"Brazil, the world’s 11th-largest economy, is a major regional driver and will become more so as Argentina collapses," says STRATFOR's Decade Forecast.

"But aside from extending its influence southward, the South American geography of deserts, jungles and mountains prevents Brazil from reaching beyond its immediate neighborhood. It will be a regional power — even a dominant regional power — but it will not exert strength beyond that scale."

Japan: desperate for labor

"Japan will face an existential crisis in the next decade, deciding who it is and what kind of nation it is going to be," says STRATFOR's Decade Forecast.

"Its demographic problem is particularly painful, and Japan has no tradition of allowing massive immigration. When it has needed labor it has established colonies in Korea and China. As China shifts its economic pattern, it will need outside investment badly. Japan will still have it to give, and will need labor badly. How this relationship evolves will define Asia in the 2010s."

Africa: non-factor

"I don't think most of Sub-Saharan African ever thinks that they're the country of the future," says Zeihan. "Africa has not ever functioned on the global scale."

He adds: "It is always whether other countries go to fight their proxy wars. Because their is no peer power to the United States and we don't see one rising in the next decade, there is no peer conflict to be had in Africa. For awhile it looked like the Chinese might have played a role, and they still are poking around looking for things to invest in, but it's very, very small scale, and -- to be perfectly blunt -- the Africans just don't trust the Chinese. You're going to be seeing a brewing conflict, for example, between Angola and South Africa, but that's a very local event."

Mexico: rising

"Mexico, the world’s 13th-largest economy, is often ignored because of conflicts involving its drug cartels and the government," says STRATFOR's Decade Forecast.

"However, organized crime manages over time to come to stable understandings, normally after massive gangland wars. Means are created to maximize revenue and minimize threats to leaders. Since inexpensive agricultural products like cocaine command vastly higher prices in places like Los Angeles than where it is produced, a well-organized criminal system in Mexico will continue to supply it. This will cause massive inflows of money into Mexico that will further fuel its development."

U.S.-Jihadist war: cooling

"The U.S.-jihadist war is in the process of winding down. It will not go away, but where in 2005 it defined the dynamic of the global system, it is no longer doing so," says STRATFOR's Decade Forecast.

"This does not mean that Islamist militancy will be eliminated. Attempts at attacks will continue, and some will succeed."

America: dominant in retreat

"From the American point of view, the 2010s will continue the long-term increase in economic and military power that began more than a century ago. The United States remains the overwhelming — but not omnipotent — military power in the world, and produces 25 percent of the world’s wealth each year," says STRATFOR's Decade Forecast.

"The United States will withdraw for a while from its more aggressive operations in the world, moving to a model of regional balances of power which Washington maintains and manipulates when necessary. This will not manifest as introspection, but rather as a rebalancing of U.S. attention and force posture."

But, some U.S. dangers

STRATFOR says two issues will haunt the U.S.: Mexico and retirees.

The report says America's southern neighbor poses several issues: "First, Mexico is a rapidly growing but unstable power on the U.S. border. Second, Mexico’s cartels are gaining power and influence in the United States. Third, the United States will be trapped by a culture that is uneasy with a massive Mexican immigrant population and an economy that cannot manage without it."

On its aging population, "The United States’ biggest demographic- related problem in the 2010s will be financial: retiring baby boomers will generate a capital crunch that will have to be dealt with by not allowing them to retire, cutting retirement benefits sharply or both. This is a serious concern, but one the United States shares with the rest of the developed world."

Conclusion

"We do not see the 2010s as a period of decisive change. Rather it is a period in which basic processes stay in place, while the emerging demographic process surfaces as a major driver in the system," says STRATFOR's Decade Forecast.

"The United States will remain at the heart of world power; a country with 25 percent of the world’s economy and forces like the U.S. military cannot be ignored. But as the demographic problem begins to take hold, the countries most affected by it will have to turn their attention inward."